Is Life Insurance a good investment?
There are as many different opinions on if life insurance is a wise investment as there are people selling life insurance. But in the end, no other investment will guarantee you the return on your investment upon your death as a life insurance policy. The point that many people argue is if cash value insurance offers a rate of return that would make it a better investment than other or more traditional investment products. Comparing cash value life insurance to a retirement account, stock account, or a mutual fund isn’t an entirely fair comparison. Cash value life insurance does two things that none of the other accounts can; it offers a guaranteed minimum rate of return as well as a death benefit. I can’t imagine anyone who sells life insurance would suggest a cash value policy being the only account someone has retirement. But in many cases a cash value policy is a good investment, and should be considered when structuring a diverse investment portfolio.
How much of a death benefit do you need?
The death benefit, which is the amount that is paid out upon the policy holders’ death, is the cornerstone of this financial investment. How much in insurance depends on many factors including the total amount of debt, do you have college bound children, and how much income per year would your family need per year upon your death. Once you have figures out all the money you will need, the next step is to figure out all the money you already have. Your retirement account, stock and bond investments, and social security can all be used to subsidize your lost income.
The easier way that most people are opting for is to multiply your annual net income by five, and buy that amount of insurance. Adjust that rule of thumb for your own situation: If your spouse earns good money, or could earn substantially more than he or she does now, buy less. If you have small business that you run out of the house, and also manage the home at the same time, you may want to buy more to make up for the loss in income as well as possibly the need to hire someone to help run the home.
Types of Life Insurance
There are two basic types, term life insurance and permanent life insurance, also known as cash value. Permanent life insurance is divided into four subgroups, Whole life, Universal life, variable life, and Variable Universal. However, first we will focus on Term Life Insurance.
Term Life Insurance
Term life insurance is the quickest, cheapest, and easiest way to buy life insurance. Term insurance works like car insurance, with set annual premiums for a set amount of coverage. Every year you pay your premium, but if you stop paying, the policy lapses and your insurance policy are cancelled and you don’t owe any more money. Term life insurance makes sense for people who are looking to protect their family from financial loss, and have other sources of retirement savings, and aren’t looking for income after they retire. Life insurance increases in price every year you get older. The policy a 30 year old may buy today would have cost less at age 29, even though the amount and duration of the policy is the same, simply because of the average life span and the increase in probability of death. Because life insurance increases in cost every year, someone with a term life insurance policy may not find insurance to be affordable when the term policy is over. If you are looking for coverage that will cover your entire life, a term life insurance policy is not what you’re looking for.
If you expect you will need life insurance no matter how old you are, permanent or a cash value policy is better suited for your needs. This type of insurance policy offers the death benefit like a term policy, but also a tax-deferred investment capability. The four subgroups of cash value life insurance policies are as follows.
Whole Life Insurance
Whole life is the old-fashioned kind of life insurance; guaranteed premiums, cash values, and death benefits. The insurance company invests the cash value where it sees the best mix of growth and safety and uses dividends earned to reduce future premiums. For example, a whole life insurance policy with a $250,000 death benefit coverage for a 40-year-old at a fixed $3,657 annual or $310.88 monthly premium. After 10 years the policy will have gained enough cash value that you would no longer have to make any more annual premium payments, and at 65 years old the cash value would be at a minimum of $101,930 and as much as $237,342. If the policy only met the minimum cash value amount of $101,930, the rate of return would be slightly less than 5% per year, but when compared to other investments with no guaranteed rate of return, and considering the death benefit of $250,000, whole life insurance is a wise investment for those that can afford the premium payment.
The same policy would cost $1,872 a year or $159.16 a month for a 25-year-old, with a guaranteed cash value of $119,310 at age 65. A 60-year-old buying that policy could expect to spend $10,500 a year or $892.50 a month for a guaranteed cash value of $35,552 in five years.
Universal Life Insurance
Universal life insurance lets the policyholder raise or lower the death benefit and vary the amount or timing of the premiums that feed into the cash value part of the policy. This helps you invest more through your insurance policy when you have extra money to contribute and spread payments out when you haven’t much to spend. Universal life insurance is better able to take advantage of high interest rates, and policy earnings than whole life, but it’s also more susceptible to disappointing returns that could extend or raise the premiums. And a curious aside that this policy matures when the policyholder is 95. That means the retired policyholder could keep the cash value, even continue to invest the cash value through the insurer, but he would no longer get any death benefit.
Variable life insurance gives the policyholder a selection from four or more mutual funds for the investment portion of the policy’s cash value. Many insurance companies use captive mutual funds run by their own subsidiaries or relative companies, but others arrange investments in well known funds.
Variable universal policies are hybrids of the last two groups and got very popular in the 1980s. Policyholders can manage their own insurance investments and use their earnings to adjust their premiums. While these policies provide tax-deferred benefits for your investment, don’t mistake them for retirement accounts. They carry mortality charges and insurance related services fees that make them less valuable than the typical Keogh or SEP for the nest egg builder.
Contact us to see if you can save money on your insurance by speaking to a professional independent insurance agent at Journey Insurance.
Let us sift through the hundreds of insurance programs to find you the most competitive rates available. Let us do the paperwork while you spend your time doing something you actually enjoy!
Journey Insurance Agency * Irvine, California * 888.323.7480
More from my site